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What is matching concept in finance & accounting?
Matching concepts tells about expenses incurred during a period to be recorded in the same period in which revenues are earned. Revenues and expenses in income statement are matched for a period of time. Investors get a better idea about economics of the business.
Product cost − These are tied directly to products and in turn revenues.
Period cost − These don’t have corresponding revenues.
Commission − If an employee earned x% of commission on sales in current month and that commission is paid in next month, then that transaction is recorded in present month.
Depreciation − If a company buys a machine and its life is 8 years. Then, cost of equipment is recorded in depreciation expenses at the rate of cost per year.
Employee bonuses − It is based on employee performance in that financial year he/she will earn bonus in that year and will be paid next year.
Benefits of matching concept includes −
- Consistency in financial statements.
- To avoid misstating profits for a period.
- Balance cost over a period of time.
- Long term assets experience depreciation.
|18 – Jan||Cash||8000|
|20- Jan||Total account||1800|
|Unearned service revenue||2000|
|Unearned service revenue||1350|
|27 - Jan||Cash||1800|
|31 – Jan||Wages expense||10000|
|2 – Feb||Wages payable||6000|
In the above table, last entry made in Feb 2, but a temporary entry made in Dec 31st which is the actual payment date. Since, it is close of the month and the actual transaction is made on Feb 2nd another entry is made on Jan 22nd but the actual amount is received on Jan 27th.
Similarly, contract was received on Jan 23rd and cash was paid as well, so it has to be entered on same date instead of Feb 2nd where contract was carried out.
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